Crowdfunding is a way to collect money “from the crowd,” depending on the collection conditions when each baker invests a certain amount of money. They voluntarily pool cash or other resources to support the authors of an exciting idea. And if the case is worthwhile, its organizer will be able to bring it to an end and reward the donors. The question is how to make an effective crowdfunding software platform. Specialized companies such as LenderKit can answer it.
How much is missing?
A specific end date for the investment is set for a crowdfunding project. The founder also indicates the amount he needs to raise during this time. In crowdfunding, all receipts are visible; this is the main principle of this collection method. The investor must understand where and in what amount his money went. In return, he receives either a part of the future profit of the project or the total amount of funds contributed. Some projects provide for a gratuitous donation.
Crowdfunding is usually used when it comes to launching a startup. This fundraising method is also suitable for such projects:
- charitable
- educational
- environmental
- online platforms of a different spectrum (online media).
Project authors have been actively raising money for personal purposes in recent years.
How crowdfunding works
Project backers can expect to receive one or another benefit or invest in it free of charge. Depending on how the founder will pay them, there are several main types of crowdfunding:
- based on donations — this type of funding is intended only for non-profit and personal projects;
- for a reward — project participants receive valuable prizes; it’s relevant for projects at the presale stage;
- with the attraction of debt capital (Debt-based Crowdfunding) — investments in exchange for a return of money with a percentage of the project’s profit;
- equity crowdfunding — money in exchange for a share in the project, involves more serious investments of participants;
- in exchange for a fixed number of new units of cryptocurrency — startups issue their cryptocurrency and exchange it for other popular ones like Bitcoin or Ethereum.
Crowdfunding and cryptocurrency
Digital currencies allow users to invest around the world, and entrepreneurs, in turn, get an increased likelihood that the amount claimed will be collected.
Advantages of cryptocurrency:
- Safety. Information about all transactions is stored in the blockchain network. This means that no information can be faked or changed.
- Minimum commissions. Payments in cryptocurrency are carried out with minimal costs or without them at all.
- No boundaries. With the help of cryptocurrency, you can pay from any country.
- Transaction speed. Coins are credited to the account in a matter of minutes, regardless of which country and at what time of the day the payment was sent.
- Return guarantee. Contracts are created by smart technology, which is impossible to interest.
Crowdfunding and banking system
The emergence of crowdfunding platforms seemed like a promising alternative to banks. However, now they are still more like an experiment, the success of which depends on their ability to cope with the emerging risks of trust.
The banking system distinguishes four types of crowdfunding:
- p2p lending, when both the investor and the borrower are individuals;
- p2b lending, when the investor is an individual, the borrower is a legal entity;
- b2b lending, when both the investor and the borrower are legal entities;
- rewards-crowdfunding, when money is raised for projects for non-financial rewards.
Excellent prospects were associated with crowdfunding — it was believed that a tool had finally appeared that would allow refusing the services of unnecessary intermediaries who receive a commission for shifting money from one pocket to another. But time passed, and it became clear that not everything was so simple.
What is a crowdfunding platform?
Crowdfunding is carried out on unique platforms (examples on the LenderKit page). To start collecting money, you must choose a suitable site that meets the project’s specifics. At the same time, all actions of founders and backers must comply with the norms of the current legislation.
In addition, you need to carefully read the platform’s rules to avoid being left without money. The fact is that some of them follow an all-or-nothing policy. This means that if the project founder sets a goal to raise a certain amount by a specific date but fails to achieve it, he may not receive any money.
There are also sites where you must collect at least 50% of the declared funds. However, in this case, the commission for the project founder will be higher than 100%.
Even if the project is hosted on a platform that does not impose such restrictions, it is necessary to independently assess the chances of success of the stated goal. We are talking about those projects that involve rewards or refunds to backers.
It is also useful to find out how long the chosen platform has existed, its reputation, and how many successful projects have already been implemented. You can try to contact other founders who have posted their projects there.
You can always hire a crowdfunding company if you don’t have the time or inclination to go into these details.
Success secrets
Before launching a project, you need to understand the product’s audience and competitors and try to predict the level of interest in the idea.
- It’s also a good idea to conduct an advertising or PR campaign;
- After choosing a platform, you need to create a profile with a description of the project, documents, and a marketing plan;
- Then you need to turn to the inner circle — those who are potentially loyal to the project;
- At the stage of the campaign, you need to constantly inform the audience about all the updates and provide feedback.
The funds raised through crowdfunding are also considered income. An individual pays income tax on the amount of attracted money, and a private company pays according to the chosen system. A non-profit organization can arrange a collection of money as a donation.
